FHA Home Loans – Borrower beware of your lender when buying or refinancing 3 Unit & 4 Unit properties
FHA Loan requirements have been changing all across the board in the last 18 months. When it comes to FHA loans for a borrower trying to purchase or refinance a triplex (3 unit) or a quad (4 unit), there are some important requirements that have changed.
This is based on my 2nd borrower as in many as 10 days that was not given proper information on residential properties that are 3 or 4 units.
For all maximum mortgage amounts on FHA Loans, regardless of the number of units. - FHA mortgage amount limits - Showing 1 family (single family units), 2 family, 3 family, & 4 family
Important things to know with multi unit properties with a FHA Loan
2 Unit Properties - Duplexes
Buying or refinancing a duplex with a FHA loan follows the same guidelines as it does for a single family dwelling. The only difference is that one of the units must be your primary residence and you can only use 75% of the rental income to help you qualify for that property.
3 Unit & 4 Unit Properties
This property still must be your primary residence, meaning that you must live in one of the units. The good news is that you still only need 3.5% down on the FHA mortgage. On a conventional loan, there are LTV restrictions and even pricing hit adjustments for the worse when it's a 2 to 4 unit. Some other restrictions or guidelines for 3 to 4 units with a FHA loan.
- Self-Sufficiency Test - The borrower must meet this test for either a purchase or a refinance. The test states this :
Gross rents less the vacancy factor for all units, including the owner-occupied unit, must be => the PITI for the subject property. The Vacancy Factor is explained here : FHA Vacancy Factor
In layman's terms, the total rents must be the same or greater of the total monthly mortgage payment, to include taxes, homeowners insurance, and the mortgage insurance. These rents must be determined by a FHA certified appraiser. Meaning that you can't use rental leases for this specific test. Self-Sufficiency Test info found in HUD 4155.1 2.B.4
Rental Income to qualify - You still need to also qualify with the normal debt-to-income ratios in regards to your income, in which you can use the rental income. But you can only use 75% of the rental income for the purpose of this qualification. As the primary borrower, you can't use what you would pay for that unit as rent to offset your mortgage. All you are including in order to qualify is your monthly gross income.
- Reserves - When buying a 3 or 4 unit, you must have 3 months PITI in reserves. These reserves can't come from a gift. HUD 4155.1 Mortgage Credit Analysis - You do not need any reserves for a refinance.
Summary : These are normal HUD guidelines for FHA loans. Keep in mind that some investors and or lenders might have investor overlays, meaning that they can add to these basic guidelines. And what inspired me to write this post today was because of a borrower that contacted me and what she wasn't told. She wasn't aware or told that she needed 3 months in reserves when trying to buy her current property. She needs to close in 30 days, yet she would have needed $9,372 after closing, as reserves. She said that she wouldn't have this for another 4 months or so. So as you can see, this loan would have never closed in the next 30 days with the previous lender because the loan officer didn't know the basics. Buyer beware.
KEY FOOTNOTE - You can't use a FHA mortgage to buy any type of property as an investment property. And for first time homebuyers, this is a great way to have someone help with your mortgage payment and to help build equity... by buying a 2 to 4 unit property.
Important Reminder – It’s cheaper to purchase a 3 unit or a 4 unit with a FHA Mortgage than with a conventional mortgage for several reasons, even if you have 700 + credit scores. Speak to an FHA Expert to find out these differences.
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For more information on FHA loans, please go to this link. The FHA Expert
For more information about the 2009 Tax Credit for First Time Homebuyers : 2009 Tax Credit
For important mortgage insight to watch for, please read : Consumers need to be aware of these Red Flags!
Copyright © 2010 by Jeff Belonger of Infinity Home Mortgage Company, Inc